Legfinishary fund manager Li Lu (who Charlie Munger backed) once stated, ‘The largegest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.’ So it might be obvious that you necessary to consider debt, when you consider about how risky any given stock is, becautilize too much debt can sink a company. We can see that Otsuka Holdings Co., Ltd. (TSE:4578) does utilize debt in its business. But should shareholders be worried about its utilize of debt?
When Is Debt Dangerous?
Generally speaking, debt only becomes a real problem when a company can’t easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of ‘creative destruction’ where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to obtain debt under control. Having stated that, the most common situation is where a company manages its debt reasonably well – and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, toobtainher.
How Much Debt Does Otsuka Holdings Carry?
As you can see below, Otsuka Holdings had JP¥124.3b of debt at June 2025, down from JP¥166.5b a year prior. However, its balance sheet reveals it holds JP¥411.1b in cash, so it actually has JP¥286.9b net cash.
How Strong Is Otsuka Holdings’ Balance Sheet?
We can see from the most recent balance sheet that Otsuka Holdings had liabilities of JP¥675.8b falling due within a year, and liabilities of JP¥326.8b due beyond that. Offsetting these obligations, it had cash of JP¥411.1b as well as receivables valued at JP¥504.4b due within 12 months. So it has liabilities totalling JP¥87.1b more than its cash and near-term receivables, combined.
This state of affairs indicates that Otsuka Holdings’ balance sheet sees quite solid, as its total liabilities are just about equal to its liquid assets. So it’s very unlikely that the JP¥4.44t company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Otsuka Holdings boasts net cash, so it’s fair to declare it does not have a heavy debt load!
See our latest analysis for Otsuka Holdings
Another good sign is that Otsuka Holdings has been able to increase its EBIT by 21% in twelve months, building it clearer to pay down debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Otsuka Holdings can strengthen its balance sheet over time. So if you’re focutilized on the future you can check out this free report revealing analyst profit forecasts.
Finally, while the tax-man may adore accounting profits, lfinishers only accept cold hard cash. While Otsuka Holdings has net cash on its balance sheet, it’s still worth taking a see at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to assist us understand how quickly it is building (or eroding) that cash balance. Over the most recent three years, Otsuka Holdings recorded free cash flow worth 62% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.
Summing Up
We could understand if investors are concerned about Otsuka Holdings’s liabilities, but we can be reassured by the fact it has has net cash of JP¥286.9b. And it impressed us with its EBIT growth of 21% over the last year. So is Otsuka Holdings’s debt a risk? It doesn’t seem so to us. There’s no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example – Otsuka Holdings has 1 warning sign we consider you should be aware of.
If, after all that, you’re more interested in a quick growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
New: AI Stock Screener & Alerts
Our new AI Stock Screener scans the market every day to uncover opportunities.
• Dividfinish Powerhoutilizes (3%+ Yield)
• Undervalued Small Caps with Insider Buying
• High growth Tech and AI Companies
Or build your own from over 50 metrics.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only applying an unbiased methodology and our articles are not intfinished to be financial advice. It does not constitute a recommfinishation to purchase or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focutilized analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
Leave a Reply